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The state needs rules for the foreign investments of public undertakings

TALLINN, 7 December 2016 – The audit of the Jordanian and Utah projects of Eesti Energia carried out by the National Audit Office indicates that the state of Estonia needs a uniform understanding of whether and on what conditions commercial undertakings belonging to the state could invest in foreign projects.

The National Audit Office analysed the projects of Eesti Energia in Jordan and in Utah, United States, and found that both the supervisory board of Eesti Energia and the Minister of Economic Affairs and Communications have approved these investment decisions. The significant risks of all projects had been identified before the investment decisions were adopted. However, the audit revealed that the supervisory board, management board and general meeting of Eesti Energia knew that the Utah oil shale project was a risky investment, but the political support in Estonia and also in the United States gave them the confidence to proceed with the project. The oil shale deposit in Utah was purchased in a rush, because another investor was also interested in the land and the mineral reserves.

The initial plans of producing and processing oil shale have still not been implemented, because the price of oil shale has dropped and processing the oil shale of Jordan and Utah has proven to be more complicated and expensive than planned.

The project of building a power station in Jordan, which has reached the pre-construction stage, has progressed the most among the projects analysed during the audit. Eesti Energia has reduced its holding in this project to 65% and is currently in negotiations to reduce it to 10%. Although Eesti Energia is planning to invest tens of millions of euros in the construction of the power plant in Jordan from 2016 to 2019, it is of the opinion that the proceeds of the sale of the holding will cover most of the investment and guarantee the expected return on capital.

The National Audit Office finds that at the time of developing the projects in Jordan and Utah, Eesti Energia has no certainty that in addition to implementing these ambitious foreign projects, it would also have adequate resources and possibilities for making the necessary investments in Estonia. When the decision on the Utah project was made in 2010, the foreign investment budget of Eesti Energia was small than the intended total investment in the projects in Jordan and Utah. In addition to the foreign projects, Eesti Energia was also planning to make major investments in the Auvere Power Plant, Enefit280 oil plant, distribution network and desulfurisation equipment in Estonia.

The present chairman of the management board of Eesti Energia confirmed in the course of the audit that the development of foreign projects has not caused the implementation or postponement of strategically important investments in Estonia.

The audit revealed that Eesti Energia has updated its decision-making processes in the course of the development of foreign projects and considerably reduced the risk level of its investment projects. In the audit, the National Audit Office advised the Minister of Finance to guarantee that all public undertakings proceed from the same principles when making decisions about and implementing major investments, which would make it possible to develop large projects with the smallest possible risks and expenses, and to implement them in stages.

Auditor General Alar Karis said the following when commenting on the audit results: “The objective of every undertaking, including a public one, is to make profit. However, the Estonian market is very small and when the opportunities of increasing one’s income at home start running out, it is understandable that the management board and supervisory board start looking for opportunities to earn income abroad. It is also understandable that investing outside Estonia comes with higher risks, as the circumstances are unknown and failure is more likely. Failure cannot be excluded, but its probability can be reduced by thoroughly weighing the decisions made about the projects and by identifying and, if possible, mitigating all the risks before the decisions are made.

“The decisions about the development of the Jordanian and Utah projects of Eesti Energia covered in the audit of the National Audit Office were made by the supervisory board of Eesti Energia and the company’s owner, i.e. the state of Estonia. In general, there isn’t much to criticise about the way decisions were made in the projects. What can be pointed out is that decisions were made in haste in the case of the Utah project, as there was a competitor to beat. Some circumstances should have been given more attention. It is still early to say whether the Jordanian and Utah projects of Eesti Energia were successes or failures, because the project plans have not been completed yet. The current status of the projects has been largely influenced by an external factor independent of Eesti Energia – the decrease in oil price, and processing the oil shale has also proved to be more complicated. However, it is certain that the development of the foreign projects has been a learning curve and a source of valuable experience. In light of this information, it is necessary to agree on whether and under which conditions public undertakings could launch foreign projects that entail certain risks. The conditions of developing foreign projects should be thought through and the rules for making decisions should be established. Who will make the decisions about taking big risks in a public undertaking – is the minister who manages the undertaking’s holding, or the supervisory board or management board of the undertaking? Or should these decisions be made by the Riigikogu or the Government of the Republic? Who will be responsible if the plants to conquer the world go awry? How can it be guaranteed that the business back home is not damaged if the worst case scenario comes true? I am certain that the Minister of Finance will think about this, as advised by the National Audit Office in the audit.”

Background
Eesti Energia is a commercial undertaking that belongs 100% to the state. In the last ten years, Eesti Energia has paid the state dividend income of approximately 670 million euros and invested approximately 2 billion euros in various projects.

At the start of the Jordanian and Utah projects, Eesti Energia planned to invest several hundred millions of euros in the establishment of shale oil industries in Jordan and Utah and in the establishment of an oil shale power plant in Jordan. As at the first half of 2016, Eesti Energia has actually spent 4.3 million euros on the establishment of the shale oil industry in Jordan, 20.4 million euros in the development of the electricity project in Jordan and 49.7 million euros in the development of the shale oil project in Utah. The activities related to the implementation of the shale oil production projects of Eesti Energia in Jordan and Utah are currently being carried out to a limited extent. Eesti Energia wrote down the Utah project by 26 million euros in early 2016.